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Because elasticities of supply & demand with respect to price are low, relatively small fluctuations in demand (due, for example, to weather) or in supply (due, for example, to disruptions) require a large change in price to re-equilibrate supply and demand.

Demand elasticities are low in the short run largely because the capital stock is designed to operate with a particular ratio of energy to output.

Supply elasticities are also often low in the short run because it takes time to adjust output.

High interest rates reduce the demand for oil, or increase the supply, through 3 channels: ¤ by increasing the incentive for extraction today rather than tomorrow; ¤ by decreasing firms' desire to carry inventories (oil stocks held in tanks or tankers) ¤ by encouraging speculators to shift out of spot oil contracts, and into treasury bills.

All 3 mechanisms work to reduce the market price of oil, as when real interest rates where high in the early 1980s.

A decrease in real interest rates has the opposite effect, lowering the cost of carrying inventories, and raising oil prices, as happened from Aug. 2007 to Sept. 2008.

The spot price of oil especially on a day-to-day basis, is determined in markets where participants typically base their supply and demand in part on their expectations of future increases or decreases in the price.

Cal “goes long” in the market for beans, anticipating an increase in demand if the USA enters World War I.

Sure enough, the price of beans goes sky high, Cal makes a bundle, and offers it to his father.

But the father is morally offended by Cal’s speculation, not wanting to profit from others’ misfortunes, and angrily tells him that he will have to “give the money back.”

Cal has been the agent of Adam Smith’s famous invisible hand: By betting on his hunch about the future, he has helped raise the price of beans in the present, thereby increasing the supply so that more is available precisely when needed (by the British Army).

The movie even treats us to a scene in which Cal watches the beans grow, which real-life speculators seldom get to do.